Break-even point and pricing
This Break-even point and pricing Info Guide explains what break-even point is and why it pays to know your break-even point when setting prices.
Pricing methods often used by hotels include:
- Cost-plus pricing
- Margin pricing
- Value pricing
- Going-rate pricing
While these pricing methods have advantages, none guarantees that a hotel will cover its total costs or make a profit.
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To ensure that all your costs are covered, you should use a Break-even pricing approach which takes into account the total fixed and variable costs of an activity, such as a restaurant or a hotel.
For more on Break-even point, see our Know your break-even point Info Guide
Break-even pricing: Advantages
Break-even pricing enables you to:
- determine the minimum sales value required for a business to break-even.
- calculate the average room rate, average price per dish or average spend per customer required to achieve break-even, ie the price at which all costs are covered, and the business is making no profit and no loss.
- takes account of all your business costs so that you avoid slipping into a loss-making situation.
Remember!
You need to check your calculations regularly to ensure that you identify any significant cost changes and update your prices to reflect those changes.
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| Break-even Point: Hotel Grill Bar Example |
| Profit and Loss Account - Hotel Grill Bar |
€ |
| Sales (6,000 guests spending €20 each, excl. VAT) |
120,000 |
| Cost of Sales (food and beverage costs) |
48,000 |
| Gross margin |
72,000 |
| Other variable costs (eg, linen and variable element of pay and energy) |
18,000 |
| Contribution to fixed costs and profit (45% of Sales) |
54,000 |
| Fixed costs |
40,000 |
| Profit |
14,000 |
| |
This Hotel Grill Bar will break-even at a sales level of €88,889, calculated as follows:
Average spend per customer
In the Hotel Grill Bar example, the average spend per customer for the expected 6,000 covers, or the minimum average price, is €14.81:
If the number of covers falls to, for example, 5,000, the minimum average price will need to be revised upwards to €17.78 in order to remain at break-even point:
Remember!
This assumes that cost of sales and other variable costs remain in proportion to sales value. If these change, or if the total fixed costs change, the break-even pricing calculation will need to be re-done.
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You can use break-even pricing to calculate the minimum average price at which rooms can be sold in order for your hotel business to break-even. The contribution from all sales above this break-even point, ie, sales value less the direct costs of additional sales, is clear profit.
Remember!
You need to know your costs and break-even point to know how low your price can drop.
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| Break-even pricing: Rooms Example |
| A 75-room hotel has an expected occupany rate of 50% for February. What average room-rate needs to be achieved in order to break-even in February? |
| Rooms department fixed costs |
€80,000 |
|
| Contribution required from Rooms is therefore: |
€80,000 |
|
| Expected room sales |
1,050 |
45 rooms x 28 nights x 50% occupancy
|
| Contribution required per room |
€76.19 |
€80,000/1,050
|
| Variable cost of an occupied room (eg cleaning room) |
€15.00 per room |
|
| Average room-rate needed (excl. VAT) |
€91.19 |
€76.19 + €15.00
|
| Average room-rate including VAT @ 13.5% |
€103.50 |
|
| |
- €103.50 is the average room-rate, including VAT, which needs to be achieved in order to break-even in February based on an expected occupancy level of 50%.
- Any contribution made by sales above this point - €76.19 per room (sales at €91.19 less variable cost €15) – is clear profit.
- In order to improve occupancy above 50%, the hotel could discount room sales made above this point.
Quick Break-even & What If? Calculators
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